Which loan type and term should I choose?
Save now, or save later? Are you comfortable with risk, or do you prefer the predictability of fixed monthly payments? Your answers will go a long way toward helping you decide on your best loan options.
Your loan type: ARM vs. fixed rate
Adjustable-rate mortgages (ARMs), with their low initial cost, can be very tempting, while fixed-rate mortgages offer a degree of security—but at a cost.
ARM – Your interest rate may rise at the end of the adjustment period. Consider this option if you want lower monthly payments at the outset or if you want to keep your long-term options open. For example, if you move or trade up to a bigger home before the end of the adjustment period, you'll be able to benefit from the lower rate before a possible increase takes effect.
Fixed-rate mortgage – Even if market interest rates go up, your mortgage interest will remain the same for the life of the loan. This makes your monthly payments predictable. While your property taxes and home insurance may cause slight fluctuations in your monthly payment, they likely won't have the same impact as your interest rate.
Your loan term: 15- vs. 30-year
Your decision to go with either a 15- or a 30-year mortgage depends on your current financial situation and your long-term goals. It's a major decision with long-lasting effects, so consider your options carefully.
15-year mortgage – You'll have a higher monthly payment, but you'll pay less overall and be able to pay off your home more quickly.
30-year mortgage – You'll have a lower monthly payment, but over the life of the loan, you would pay more interest than with a 15-year mortgage.
The bottom line
Only you can judge which loan type and term makes the best sense for your financial situation. Crunch the numbers and carefully consider the pros and cons of an ARM versus a fixed-rate mortgage. As a general rule of thumb, opt for a 30-year mortgage unless you are fully confident in your ability to consistently make the higher payments that come with a 15-year term.
Keep it up. You're getting smarter about home buying.
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